Interview with John Firth, CEO of Acclimatise
Victoria van Lennep, Economist Intelligence Unit: What are the risks facing companies outsourcing part of their businesses to countries with low labour costs but subject to extreme events and with poor infrastructure?
John Firth: It is important to emphasise that it is not just an issue of outsourcing to countries with low labour costs, it is outsourcing generally and companies understanding their supply chains. Operating in developing countries may bring additional risks and increased stress due to the lagging infrastructure needed to support the level of industrial development that has taken place. In Thailand for example, an enormous amount of industrial development was placed in low-lying river floodplains, and the supporting infrastructure such as flood defence, utilities and transport in general couldn’t cope when the country was hit by major floods in October 2013. This means that even if factories weren’t flooded, companies were still as affected as anyone else since they couldn’t transport their goods.
So when companies outsource their supply chain to emerging economies, it is important that they look at the resilience not just of their factory and manufacturing process, but also of the whole country’s infrastructure.
How have impacted businesses dealt with natural disasters such as the 2011 floods in Thailand?
Some companies think Thailand was just a one-off streak, and thus have treated it as an extreme event, following a process of contingency planning. Other companies have realised there is a set of signals we are picking up around the world that climates are changing, and so those companies are the way they run their business fundamentally. They now have much more resilient supply chains because they are studying the changing risk landscape in front of them.
Just over three years ago, the US Security and Exchange Commission (SEC) issued guidance for companies advising them to disclose (in their annual report) their potential material risks associated with climate change. Since then, a number of investors pursuing shareholders’ resolutions have asked companies to undertake a risk assessment on the effects of climate change. Executives will need to be able to demonstrate they acted in the best interest of their company.
Which sectors are the most at risk in the face of climate change?
Particularly at risk are sectors involved with fixed long-life assets (e.g. transport, energy, water), where there isn’t any flexibility regarding the ability to build in resilience at a later date. Climate change and different circumstances from those against which companies originally built such assets change will put a strain on design thresholds and parameters will be affected.
But climate risks can also be crucial for companies that don’t have assets. For example, we at Acclimatise have been working with a major grain wholesaler and food processing company, and they increasingly have to take more account of the weather, and by implication the effect that climate is having on the weather, because it has affected their commodity price. So while they don’t hold fixed assets, there are lots of short-term fluctuations and issues they need to address because of climate change impact.
Would you say it is necessary for companies to have a climate change resilience strategy today?
What is needed is not a specific climate change strategy but a supply chain that is resilient to climate change. Furthermore, we are increasingly realising that the answer is not a national climate change strategy but national development planning that has climate change fully integrated into it, especially for developing countries.
Successful businesses manage risks and uncertainties well and climate change is just another uncertainty they have to deal with. So when organisations are saying “climate change is too uncertain, therefore we will ignore it”, that is a sign of a bad business. A good business will strive to understand whether the decisions it makes today would still work under different scenarios going forward.
This interview is part of a series managed by the Economist Intelligence Unit for HSBC Commercial Banking. Visit HSBC Global Connections for more insight on international business.
